AUM of Mutual Funds at Rs 44.39 Trillion in Q1FY24

Colour of MF flows in June quarter

One of the interesting data points we track on mutual funds is the colour and direction of flows into various categories of mutual funds. These include broad categories like debt funds, equity funds, hybrid funds and passive funds. AMFI puts out this data on a monthly basis, but a more secular perspective is evident if we look at the quarterly data. Here is a quick look at the mutual fund flows for the three months of the June quarter. 

As of the close of June 2023 quarter, net AUM of Indian mutual funds stood at a record level of Rs44.39 trillion. That represents a growth of 12.6% over the previous month and was broadly driven by two factors. There were strong flows into debt funds and equity funds gained AUM due to the surge in the price of stocks. Of course, flows into equity funds and passive funds were positive, but the real boost to AUM came from the index spike.

For the quarter to June 2023, a total of Rs1.76 trillion was infused with nearly 79% coming from debt fund flows and the balance 21% coming from a combination of equity, hybrids, and passive funds. Debt funds ruled the quarter in terms of flows and that was largely thanks to expectations of rates and inflation topping out and gradually moving lower. However, most of the debt fund flows were into the short end of the yield curve only.

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Colour of debt fund flows in Q1FY24

This surely looks like a rosy picture for debt funds as they have been consistently seeing net outflows in the last 5 quarters. Normally each quarter end sees outflows from debt funds due to advance tax payouts. However, in April and May there was a reversal of such funds coming back into debt funds, which was the big positive. Investors were also locking into long dated debt funds on the hopes of making the most of higher yields and benefiting from falling yields in the future.

Which funds drove the debt fund flows? Leading the way was Liquid funds with net inflows of Rs79,908 crore in the quarter followed by money market funds at Rs29,519 crore. Other categories that saw net inflows were ultra-short duration funds, Low duration funds and short duration funds. That is largely at the short end of the yield curve. What about the segments of the debt fund universe that saw outflows? In the June 2023 quarter, Overnight Funds saw outflows of (Rs8,175 crore), credit risk funds (Rs964 crore) and banking & PSU funds (Rs826 crore). Outflows are still pronounced in segments where there is a discretion risk and investors in debt funds are just being doubly cautious after the Templeton story.

Colour of equity fund flows in Q1FY24

Equity fund flows were still positive in the June 2023 quarter but lower than previous quarters. Equity funds saw net inflows of Rs18,358 crore compared to an average of Rs48,500 crore in the previous few quarters. Clearly, investors are becoming slightly more cautious at higher levels of the index. SIP flows are robust at a gross level but NFOs are still few and far between. Let us turn to the fund categories with the maximum inflows and the maximum outflows in the June 2023 quarter.

In terms of net inflows, it was led by small-cap funds seeing inflows of Rs10,937 crore followed by mid-cap funds at Rs4,735 crore and value funds at Rs3,112 crore. Investors are clearly betting on alpha even if it means a higher level of risk.  On the sell side, large-cap funds saw net redemptions of Rs3,359 crore while focused funds saw net outflows of Rs2,093 crore. Clearly, traditional large-cap fund investors are opting for passive index funds or preferring to chase alpha through mid-cap and small-cap funds or even sectoral funds.

Colour of hybrid fund flows in Q1FY24

Just as debt funds turned around positively, even hybrid funds turned into positive. The reason was the same. It was a revival of interest in the arbitrage funds, which is classified as a hybrid fund but in reality, it is treasury management fund. Not surprisingly, it was the arbitrage Funds that led the way in the June 2023 quarter with net inflows of Rs13,722 crore followed by multi-asset allocation funds with net inflows of Rs2,507 crore. In terms of outflows, the aggressive hybrid funds saw outflows of Rs1,817 crore while Balanced Advantage Funds (BAFs) saw outflows of Rs1,042 crore. 

Colour of passive fund flows in Q1FY24

Passive funds saw net inflows of Rs13,490 crore in Q1FY24, almost a third of the previous quarter. Index ETFs saw net inflows of Rs14,717 crore while index funds saw negative flows. Passive funds now account for 17.13% of total MF AUM, and has taken a lot of share from the more active funds in the last couple of years. Also, passive AUM at Rs7.61 trillion combined with hybrid AUM is now almost as large as the debt fund AUM.

How do we sum up the quarterly flows story into mutual funds. The quarter was dominated by a revival of flows into debt funds, which is a positive signal as the asset class is seeing a lot of interest building up. Within equity funds, there is a greater preference for alpha seeking funds like small caps, mid-caps, and sectoral funds while investors are substituting large cap funds with low cost index funds. But above all, the third alternative of passive and hybrid funds are emerging as a distinct asset class in India.